More Countries Jump On 'Netflix Tax' Bandwagon

Joe Harpaz
, ContributorI analyze tax news for CFOs, investors and business leaders.Opinions expressed by Forbes Contributors are their own.

Tax authorities around the world are quickly coming to the realization that if they want to continue to capture tax revenues on the goods and services their residents consume, they better start looking to the cloud.

It’s a trend I first reported on in October of 2014 when the European Union was finalizing its plan to apply value-added tax (VAT), also known in some parts of the world as a goods and services tax (GST), to providers of broadcasting and electronic services based on the location of their customers, as opposed to the location of the provider. This shift to customer location-based taxation was revolutionary because it upended the decades-old approach of tax law rooted in physical supply chains.

That meant distributors of digital content could no longer charge their customers a single VAT rate based on the location of their servers, but now had to charge each individual customer a different rate depending on where they consumed the content. This could be a low tax regime like Luxembourg (15% VAT) or a higher tax location such as Sweden (25% VAT). It’s created a major administrative headache for content providers and regional tax authorities, but it’s also ensured that much-needed tax revenue won’t get lost as modes of content distribution and consumption change.

Now, the concept is rapidly being adopted around the globe. This latest country to announce plans to implement a consumption-based tax on digital services is New Zealand. In a new discussion paper released in August, the country’s revenue minister Todd McClay outlined the plan, which could be implemented as soon as the end of this year. Explaining that the proposed tax would address a wide range of “cross-border services,” such as digital downloads, streaming services, e-books and even professional services like legal and accounting services that are supplied remotely, McClay laid out the scope of what he hopes the new tax will generate:

“Current estimates put the amount of GST foregone on these purchases at approximately $180 million a year, and growing at around 10 per cent each year.”

McClay’s projected growth figure is really the key here. Tech news site Digital Trendsrecently suggested that Nextflix is poised to become the biggest TV network in the world with 65 million subscribers and counting. In North America, where it is the most heavily entrenched, Netflix streaming accounted for a record 36.5% of all Internet bandwidth at peak hours in the month of May 2015, according to research firm Sandvine. Streaming media is increasingly becoming the primary means of entertainment consumption around the world and tax authorities need to figure out how to tap that spigot or they risk having their models of taxation disrupted by new technologies.

The New Zealand announcement followed closely on the heels of an even more sweeping piece of digital tax legislation that was proposed for Australia this past May. The Australian proposal, which is projected to raise $350 million over four years, includes core consumer digital services, such as Netflix and music streaming, but can also be extended to cover consulting and professional services that are provided electronically.

That same logic has driven Japan to implement an 8% “consumption tax on electronic services by offshore providers” effective October 1, 2015. The new rule is very similar to the one we saw rolled out across the European Union earlier this year, with separate ways of collecting tax based on whether the services are business-to-businesses or business-to-consumer oriented. For consumer-facing businesses, offshore service providers will need to collect the tax from Japan-based consumers. For business-to-business services, the Japanese purchaser of services would be required to pay the tax to Japan’s National Tax Agency. So far, just six non-resident companies have registered with the National Tax Agency to collect the consumption tax, despite the looming deadline.